Concerns that China’s macro-economic outlook could hurt Macau’s casino gross gaming revenue (GGR) post-pandemic recovery trend have not been borne out “so far”, says a Monday memo from Morgan Stanley Asia Ltd, citing Macau casino operator commentary.
“They claim that similar to luxury sales in China, the top 1 percent of mainland Chinese are travelling and spending on entertainment,” wrote analysts Praveen Choudhary and Gareth Leung, in a note about a visit this month to the Macau market by the brokerage.
“This is why the recovery is premium [segment] led, and grind mass has lagged,” the analysts added.
They further noted: “Younger patrons are visible on casino floors as well as around the resorts. High-end customers are spending as much or even more than pre-Covid levels.”
Citigroup had said in a Sunday note that its August snapshot survey of Macau gaming floors counted 24 “whales” – idiom for very high-value casino players – the equivalent of nearly 89 percent of the 27 such big players it saw at Chinese New Year 2019.
This month, the high-value players seen were betting HKD100,000 (about US$12,767) to HKD500,000 per hand, it added.
Such levels “suggest that they are still willing and able to play, despite the current state of the economy in China,” wrote Citigroup analysts George Choi and Ryan Cheung.
Morgan Stanley observed in its Monday note that shopping activity had been particularly strong at Macau casino resorts during the industry recovery, after travel restrictions associated with the Covid-19 pandemic were lifted in January.
Morgan Stanley said that an encouraging macro-economic indicator for Macau was that “unlike other markets, [the city] is not seeing inflation”.
In July, Macau’s composite consumer price index (CPI) grew by 0.78 percent year-on-year, according to the city’s Statistics and Census Service. For the 12 months ended July 2023, the average composite CPI grew by 0.88 percent from the previous period,
Morgan Stanley said that in terms of the Macau operators’ costs, the number of total employees in the Macau gaming sector was likely to “remain 5 to 10 percent below pre-Covid levels, despite 15 percent more rooms versus pre-Covid”.
Macau operators Galaxy Entertainment Group Ltd, Sands China Ltd and Wynn Macau Ltd – firms traditionally strong in their Macau mall offer – “saw tenant sales well above 2019 levels”. In the second quarter, such sales recovered to 130 percent, 93 percent and 97 percent respectively of second quarter 2019, said Morgan Stanley.
The brokerage noted however that retail rents were “lagging” the sales growth. “Part of this discrepancy was due to reduction of the base rent during Covid,” stated the brokerage.”
“The turnover rent gets calculated on an annual basis for Sands – fourth quarter is generally higher – while Wynn calculates on a quarterly basis, and Galaxy on a monthly basis,” wrote Mr Choudhary and Mr Leung.
Junkets, slots lag
In terms of other elements of Macau casino business, Morgan Stanley said that in the VIP segment, what it termed “casual junkets” were “coming back, but the recovery might continue to be slower”.
The institution observed there were currently 36 junkets, known officially as gaming promoters and that must be licensed by the Macau government. There were 109 at the start of 2018. The recovery of the junket segment was “limited by lower profitability as revenue sharing is banned”.
Morgan Stanley added: “They could at most earn 1.1875 percent of [dead-chip] roll after tax,” because of what the institution termed a “new 5 percent tax on revenue” for the junkets.
That was a reference to a 5-percent withholding levy on commissions paid by casinos to junkets. Under the old regulatory system that had been in place until the end of last year, junkets had been allowed to benefit from a legal provision that permitted them either a total or partial exemption from taxation on those junket commissions
JP Morgan said that adding to the junket cost structure now, was the fact they often use sub-agents – known in official parlance as “collaborators” – and that these sub-agents “need to be paid around 1.0 to 1.10 percent of roll”.
Furthermore, Macau operators were “being more cautious” regarding resumption of junket-based business.
Nonetheless, Morgan Stanley said house-managed or “direct” VIP business was “already above 2019 levels and thus incremental VIP revenue should come from casual junkets”.
The institution said additionally it was “surprising” to see slot machine business “lagging mass table” play market-wide.
“In the second quarter, slot revenue grew by only 15 percent quarter-on-quarter,” versus mass-table growth of “plus 30 percent,” said Morgan Stanley.
Slot revenue was tracking 75 percent of second-quarter 2019, while mass table revenue was around 90 percent in that quarter, stated Mr Choudhary and Mr Leung.
“Sands [China] outperformed the industry with slot revenue at 94 percent of second-quarter 2019,” stated the institution.
“This suggests to us that the premium end of the slot business has not come back yet, hurting Wynn Macau [Ltd] primarily. Wynn Macau’s second-quarter slot was at only 50 percent of second-quarter 2019,” said Morgan Stanley.
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